How Long Until The Next China

Related Articles

When Zeeland clock and furniture maker Howard Miller first set up shop in China in 1997, there were dozens of workers lined up outside its Shanghai facility each day with hopes of employment. The facility has grown by 40 percent each year since, but there are no more lines.

“The people in Shanghai don’t want to work in factories anymore,” said Buzz Miller, president and COO. “They want to work in the commercial sector; they want to work in an office.”

Howard Miller, which employs nearly 3,000 workers between two Chinese facilities, is one of a growing number of West Michigan companies experiencing the reality of a changing Asian industrial base. When the company needed 100 employees last year, they were brought in on a three-hour flight from a remote village in central China.

In a fashion that is similar — though accelerated — to the growth of the U.S. economy over the past century, China’s consumer base is expected to grow 33 percent by 2020, driven largely by foreign investment. Not unlike any capitalist economy, manufacturers here and abroad are learning that the key symptom of a thriving economy is workers who want to buy more goods and services.

As such, the average pay increase in China over the last five years was 7.5 percent, according to a study by Mercer Human Resources Consulting. Per capita GDP has nearly doubled since 2000, up to $1,550. Salaries in corporate centers like Shanghai, Beijing and Guang Zhou are 20 percent higher than other large cities with less foreign investment. Pay is two to three times that of outlying rural areas.

Shenzhen, a major traffic hub, production and research center near Hong Kong, recently raised its minimum wage 12 percent, to 690 yuan ($85) per month. Other cities in the vital Yangtze Delta plan to raise their wage rate as high as 800 yuan.

The U.S.-China Business Council went on record last year concerning the changing labor market. Especially in southern cities, employers are faced with shortages of skilled labor, and have begun partnering with trade schools to develop talent. Few U.S. companies employ substantial numbers of unskilled workers, but the shortage is there, too. The council stated that China should no longer be considered a low-cost market for managerial or technical workers.

“As you develop economies, you increase wages and then they become buyers,” said Jeff Meyer, executive director of the Van Andel Global Trade Center in Grand Rapids. “We’re creating consumers on our sourcing backs, if you will.”

For companies like Howard Miller, which also opened its first Chinese retail store last year, local sales growth should negate any higher labor costs. Companies that entered the region primarily as a source for stateside consumption will find business increasingly complicated.

“Capitalism has been in some of these areas for 20-plus years,” said Jim Ward, COO of Holland logistics consulting firm Supply Chain Solutions. “It’s the same problems you find in the U.S.”

The same trends that drove production from the Midwest to the South, Mexico or overseas are now present in some Asian markets, he said.

“A good example is Shanghai,” said Les Brand, Supply Chain Solutions CEO. “It is really accelerating in what the labor force expects to get paid. At some point, there is going to be a crossroads: Multinationals will have to look at what’s going on, and maybe make some decisions about moving that activity elsewhere.”

Brand emphasized that lean principles and automation could keep facilities competitive, but the same could be said for most any facility in the U.S.

John Jiang, president of Asian sourcing firm IntLiSourcing Co. Ltd. and former international director of supply management for Herman Miller Inc., believes the rising wages are much ado about nothing.

A Chinese native with primary residence in Grand Rapids, Jiang saw the growth of Shanghai firsthand on a recent apartment search. A particular luxury apartment in the financial district was listed for 20,000 yuan ($2,500) per square meter. Although roughly an eighth of the price of a comparable Manhattan apartment, the price was grossly above historical Chinese housing values.

“There is a reason Herman Miller is in West Michigan,” Jiang said. “You wouldn’t build a furniture factory in Manhattan, would you? So why would you build one in Shanghai?”

When Jiang built his most recent facility in 2000, he did not even consider Shanghai.

Jiang’s optimism is a matter of debate, centered solely on how quickly and effectively China can deploy urban infrastructure to outlying areas. The vast majority of China has wages comparable to any low-cost market. The historical problem, however, is that these mostly rural areas are days away from coastal industrial centers.

China is aggressively expanding its highway network, and Jiang believes that effort has progressed faster than most would believe. On a recent visit, he was “amazed” to find the highway had already reached the backwater city of Guizhou.

“The idea that interior China is not good for business is outdating quickly,” he said.

Still, Supply Chain Solutions has clients skipping China for upstart Asian markets. Knape & Vogt, for instance, was lured to Vietnam. Perhaps a sign of the region’s growing maturity, the West Michigan furniture maker was not convinced by lower labor cost alone, but an aggressive incentive package from the government.

Countries in Africa and the former Soviet Union will soon become attractive sourcing destinations as well, Ward said, for similar reasons.

“In all this, it’s not where the products are made, but how you manage risk and disruption,” he said.

Companies such as Bissell have built factories in China, Mexico and Vietnam. Yet another client, Haworth, can make the Zody chair in Shanghai, in Pune, India, or in West Michigan.

Don Burke, a manufacturing consultant with The Rehmann Group in Grand Rapids, also believes that labor cost is becoming a secondary concern. While he has recently been involved in setting up operations in China, Korea, Mexico and India, many clients are choosing higher cost markets like Ireland and Australia.

“Mexico and China are still the hot ones, but now it’s more a matter of just finding the right people to do the jobs,” he said.

While Burke has seen wages climb in China, he has not seen it affect any of his clients. He argues that generous U.S. human resources standards have cushioned employers against the labor shortages and turnover issues seen by native competitors. Studies from the U.S.-China Business Council support that opinion.

He also noted a desire among U.S. employers to spend more time in exploratory efforts and trial programs before investing in an overseas facility.

Restricted Content

About GRBJ

Since 1983, the Grand Rapids Business Journal has been West Michigan's primary and most-trusted source of local business news. The weekly print edition of the Business Journal, a must-read for the area’s top decision-makers, is known as the business newspaper of metro Grand Rapids, Holland, Muskegon and all of West Michigan.

grbj.com provides the same trusted and objective business reporting that the Business Journal is known for -- plus real-time original content, timely enewsletters/alerts, exclusive blogs and more. Business Journal subscribers receive the weekly print edition, including bonus publications like the annual Book of Lists, and also complete access to all content on grbj.com.